Why current accounts improved in a number of European deficit countries – and why this tells us very little (part 2)

One of the questions often asked is about the current accounts of a number of traditional European deficit countries. Some of them record surpluses today and people wonder if this is not a positive signal. Italy, which has turned its deficit into a meagre surplus, is an example. The argument that the European economy is improving because the current account…

One of the questions often asked is about the current accounts of a number of traditional European deficit countries. Some of them record surpluses today and people wonder if this is not a positive signal. Italy, which has turned its deficit into a meagre surplus, is an example. The argument that the European economy is improving because the current accounts deficits of some countries are decreasing is often made in the media. For example, Martin Sandbu made a lot of this in The Financial Times on 9 December 2015. But how does the deep recession in Europe fit into this picture? Did it influence the development of current accounts or not?

The fact that the trade balance depends to a very high degree on the level of economic development can be shown empirically. To do so, we look at the evolution of GDP and the evolution of imports in four countries, France, Italy, Spain and Greece. Each of these countries clearly slipped during the first years into a current account deficit. Figure 1 shows the evolution.

Figure 1.

The biggest changes in the current account occurred where the largest declines in economic activity took place, it is to say in Spain and Greece…
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